Gold prices rallied and other commodities posted small gains after the US Federal Reserve cut interest rates in an effort to prop up the weakening US economy.
Spot bullion in London jumped to $894.30 a troy ounce as the US dollar weakened against the euro after the Fed cut its main interest rate by 75 basis points to 3.5 per cent and said it was ready to take further action.
Anita Soni of Credit Suisse said: "Upward pressure on the price of gold is likely being driven by weakness of the US dollar fuelled by US rate cuts."
Before the central bank's action, gold prices had tumbled to a three-week low of $849.50 an ounce as traders took profits from the recent rally in precious metals.
Earlier this month, gold prices hit an all-time high of $914 an ounce.
Tuesday's price jump was also boosted by positive comments from investment banks Morgan Stanley and Credit Suisse which raised their forecasts for average gold prices in 2008 to $950 an ounce and above $1,000 an ounce in 2009.
Barclays Capital reiterated its positive view towards the metal, forecasting a test of the $1,000 an ounce level before the summer.
Suki Cooper, a precious metals analyst at Barclays Capital in London, said: "A significant number of positive external drivers such as a weak dollar, inflation concerns and slower US growth are set to support prices"
UBS, on the other hand, remained cautious and reiterated its one-month target of $850 an ounce for gold on the weakness of physical jewellery demand.
Other analysts also continue to be guarded as exchange-traded funds, the biggest driver of investment gold demand in recent years, last week suffered surprisingly large outflows.
Other commodity prices pared losses or moved into positive territory after heavy falls, triggered by fears that the US economic slowdown could spread to emerging economies such as China and India, which have been the main engines of fresh demand for raw materials.
But traders remained cautious and warned that base metals and energy commodities could come under further pressure as soon as the euphoria over interest rate cuts had faded away.
Opec offered the starkest warning of the dangers lying ahead, saying in its monthly report: "With mounting evidence of a slowdown in US economic growth . . . fears of a downright recession have multiplied."
Sales of commodities, particularly of agricultural raw materials, aimed at raising funds for investors seeking to offset losses in other markets, had also contributed to the price fall in early morning, traders said.
Robert Laughlin of MF Global in London said that the immediate risk for commodities was "a liquidation of open positions by some market participants in order to finance positions on other markets".
Crude oil prices were mixed, after falling to the lowest level in six weeks before the Fed's interest rate cut.
ICE March Brent closed 94 cents higher at $88.45 a barrel. It had declined to a low of $85.00 a barrel.
In New York, Nymex February West Texas Intermediate settled at $89.85 a barrel, a drop of 72 cents from Friday's close.
On the London Metal Exchange, base metals recovered from early losses. Copper rose 1.9 per cent to $7,010 per tonne.
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